SCHNEIDER ELECTRIC IT BUSINESS INDIA PRIVATE LIMITED,BANGALORE V. DEPUTY COMMISSIONER OF INCOME TAX,CIRCLE-6(1)(1), BANGALORE

ITA 1585/BANG/2024

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The case involves Schneider Electric IT Business India Pvt. Ltd., which appealed against the assessment order for the year 2020-21, which included various disallowances and a transfer pricing adjustment concerning the arm's length price of interest on overdue receivables from its AEs. The TPO had treated the overdue receivables as a separate international transaction of capital financing, applying a specific interest rate based on the 6 months LIBOR rate plus a margin. The assessee contested this, arguing that a working capital adjustment would negate the need for a separate adjustment for the overdue receivables. The ITAT found that the TPO and the Dispute Resolution Panel (DRP) had not adequately addressed the impact of working capital on profitability and directed a re-examination of this issue.

• Counselvise Citation: [2025] 140 COUNSELVISE.COM (IT) 790643 (ITAT-BANGALORE)
• Duration Of Justice: 1 year(s) 3 month(s) 12 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 04-12-2025
• Appeal Filed By: Assessee
• Order Result: Partly Allowed
• Bench Allotted: C
• Assessment Year: 2020-2021
• Appeal Filed On: 22-08-2024
• Other Referred Cases: Kusum Healthcare Pvt. Ltd.
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Assessee Lawyers: ROHIT TIWARI
• Keywords: Transfer pricing; International transaction; Wholly owned subsidiary; Working capital adjustments
• Section: 143(3); 14A; 80G

Judgement Text

"IN THE INCOME TAX APPELLATE TRIBUNAL “C” BENCH : BANGALORE BEFORE SHRI PRASHANT MAHARISHI, VICE PRESIDENT AND SHRI KESHAV DUBEY, JUDICIAL MEMBER ITA No.1585/Bang/2024 Assessment year : 2020-21 Schneider Electric IT Business India Private Ltd., Tower C, 6th Floor, Bearys Global Research Triangle, Whitefield-Hoskote Main Road, Goravigere Village, Bangalore – 560 067. PAN: AACCA 6398Q Vs. The Deputy Commissioner of Income Tax, Circle 6(1)(1), Bangalore. APPELLANT RESPONDENT Appellant by : Shri Rohit Tiwari, Advocate Respondent by : Dr Divya K J, CIT(DR)(ITAT), Bengaluru. Date of hearing : 09.09.2025 Date of Pronouncement : 04.12.2025 O R D E R Per Prashant Maharishi, Vice President 1. This appeal is filed by Schneider Electric IT Business India Pvt. Ltd. (the assessee/appellant) for the assessment year 2020-21 against the assessment order passed u/s. 143(3) r.w.s. 144C(13) of the Income Tax Act, 1961 [the Act] dated 26.7.2024 by the Assessment Unit Wing, the returned income of the assessee of Rs.376,97,67,880 is assessed at Rs.411,40,53,437. Printed from counselvise.com ITA No.1585/Bang/2024 Page 2 of 8 2. The ld. AO made a disallowance of Rs.3,75,70,351 u/s. 80G of the Act, disallowed Rs.84,92,596 u/s. 14A of the Act and further disallowed deduction of health cess of Rs.3,64,87,901. 3. The only issue with respect to Transfer Pricing (TP) adjustment is the determination of arm's length price of interest on overdue receivable from its AEs determined as separate international transaction of capital financing of Rs.16,61,21,349. 4. Before us, the assessee has placed ground No.5 of the appeal. As per ground No.5.3, the only contention raised before us is that if the working capital adjustment is granted to the assessee, there cannot be any separate adjustment with respect to outstanding overdue with the AEs. 5. The brief facts of the case show that assessee is a wholly owned subsidiary of its US entity and engaged in the manufacture of power protection equipment and undertakes trading of UPS and accessories. These products are exported to its AEs. It also engages in the trading activity by importing of UPS products from other manufacturing sectors and selling in the domestic market. There is no dispute before us with respect to the other international transactions. However, the ld. TPO while working out the adjustment with respect to the business activity of the assessee did not grant working capital adjustment, rejected the same stating that assessee is not able to demonstrate that the working capital differences impacted its profit. Further no analysis was submitted that where the comparable companies have financed Printed from counselvise.com ITA No.1585/Bang/2024 Page 3 of 8 their working capital by own funds or borrowed funds and how the cost of such working capital is impacted their profitability. The TPO was of the view that cost of capital is different in different companies and further the segmental working capital is not disclosed in the annual reports and therefore no working capital adjustment is allowed. 6. He further found that there is a delay in respect of outstanding from AEs and therefore it is a separate international transaction of capital financing which needs to be benchmarked separately. Based on this, he computed the interest on overdue receivable amounting to Rs.16,61,21,349 adopting 6 months LIBOR rate + 450 Basis Points and treating it as a Comparable Uncontrollable Price (CUP) adopting benchmarking rate of interest at 6.81%. 7. When the assessee filed objections before the DRP, vide para 4.12 assessee submitted that working capital adjustment if granted to the assessee would take into account the difference in the level of account of receivables. The ld. DRP held that assessee has not filed any factual information as to the extended credit period and its impact on the profitability or pricing of the transaction and therefore it rejected the plea of the assessee that working capital adjustment would take into account the above adjustment. Accordingly in the final assessment order passed by the AO, the above condition was retained. 8. The only contention raised by the assessee is that if the working capital adjustment is granted to the assessee the addition with respect to interest on overdue receivable from AE would automatically obliterate. Printed from counselvise.com ITA No.1585/Bang/2024 Page 4 of 8 9. The Ld CIT DR supported the findings of the ld TPO as well as direction so the Ld DRP. 10. We have carefully considered the rival contentions and perused the orders of the ld. lower authorities. The activity undertaken by the assessee is of contract manufacturing, solution business and distribution activities. The assessee has entered into several international transactions and adopted the TNMM as the most appropriate method adopting Profit Level Indicator of Operating Profit/Operating Cost ratio. The ld. TPO examined the TP Study Report and stated that assessee has used only the data available upto 2020 only and accordingly the assessee was directed to provide the annual accounts of the comparable companies. The TPO noted down several defects in the TP document as per para 5 of his order and rejected the same. The objections of the assessee were considered and after that the comparables proposed in the show cause notice were adopted wherein in case of 10 comparable companies, 35th percentile margin was 4.16%, median margin was 5.77% and 65th percentile was 7.79%. Based on this, a shortfall was worked out of Rs.222,65,63,244. However, this adjustment was deleted by the DRP. However, the adjustment with respect to interest on overdue receivable from AEs remains. Therefore if the adjustment is granted to the assessee of working capital adjustment, then the separate adjustment with respect to interest on overdue receivable would not sustain. The ld. TPO has rejected the same because taxpayer has failed to demonstrate that working capital differences has made any impact on the margin of the Printed from counselvise.com ITA No.1585/Bang/2024 Page 5 of 8 assessee as well as the comparables. We find that before us also no such computation was furnished. However, we find that as per para 16, the TPO has proposed 10 comparable companies and computed the adjustment with respect to manufacturing and distribution segment of the assessee. As the comparable companies are suggested by the TPO, it is the duty of the ld. TPO to demonstrate that no adjustment with respect to working capital is required. According to Rule 10B(e)(iii), it is the duty of the person who works out the ALP by adopting TNMM to adjust the net profit margin to take into account the differences, if any, which would materially affect the amount of net profit margin in the open market. 11. In this case the comparable are selected by the ld TPO and therefore the onus lies on the ld TPO to show that if such adjustments are made , it would result in to unreasonable adjustments. This finding backed by the data is missing. Merely theoretical statements are made by the ld TPO and Ld DRP. In this case as the ld TPO has computed the ALP of business transactions, he is duty bound to show that material difference does not exits and those difference does not impact the ALP and if no such adjustments is made , it would produce reliable results. This whole exercise is missing in the TPO order and Ld DRP Directions. 12. In [2007] 107 ITD 141 (BANG.)(SB) , special bench of ITAT has held that \"127. Having regard to above statutory provisions, it is clear that burden to establish that international transaction was carried at ALP is Printed from counselvise.com ITA No.1585/Bang/2024 Page 6 of 8 on the taxpayer. He has also to furnish comparable transactions, apply appropriate method for determination of ALP and justify the same by producing relevant material and documents before the revenue authorities. In case revenue authorities are not satisfied with the ALP and the supporting documents/information furnished by the taxpayer, the authorities have ample power to determine the same and make suitable adjustments. In such a situation, as rightly admitted in the ground of appeal by the revenue, this responsibility of determination of ALP is shifted to the revenue authorities who are to determine the same in accordance with statutory regulations.\" Thus the revenue authorities cannot now shift the onus on the assessee to prove that it must be allowed working capital adjustments, when Revenue has selected the comparable and determined ALP of International Transaction. 13. Therefore, the unnecessary onus put by the ld. TPO on the assessee where the comparables are suggested by the ld. TPO to demonstrate that the working capital has impacted the profits of the assessee or the comparable company is incorrect. The TPO should himself have calculated the working capital adjustment or he could have given a categorical finding that in the facts and circumstances of the case, no such adjustment is required. The ld. TPO has merely put the blame on the assessee and denied the working capital adjustment. Similar is the finding of the ld. DRP. It is also not in dispute that if the working capital adjustment is granted to the assessee, no separate adjustment Printed from counselvise.com ITA No.1585/Bang/2024 Page 7 of 8 with respect to the interest on overdue receivable could be made in the hands of the assessee. Such is the mandate of the Hon’ble Delhi High Court in the case of Kusum Healthcare Pvt. Ltd. If the margins of the assessee after carrying out the working capital adjustment falls within the arm’s length range, a separate adjustment on account of overdue interest receivable is unwarranted 14. Neither the assessee has furnished the working capital computation nor the ld. CIT(DR) has given such working. Thus the necessary facts are not available before us to compute the same. In view of this, we restore ground No.5 of the appeal back to the file of the ld. AO/TPO with a direction to decide this issue afresh. Needless to say that if the assessee is found eligible for working capital adjustment, no separate adjustment is warranted on interest on overdue receivables. 15. No other grounds are pressed before us and therefore those are dismissed. 16. In the result, the appeal by the assessee is partly allowed. Pronounced in the open court on this 04th day of December, 2025. Sd/- Sd/- ( KESHAV DUBEY ) ( PRASHANT MAHARISHI ) JUDICIAL MEMBER VICE PRESIDENT Bangalore, Dated, the 04th December, 2025. /Desai S Murthy / Printed from counselvise.com ITA No.1585/Bang/2024 Page 8 of 8 Copy to: 1. Appellant 2. Respondent 3. Pr. CIT 4. CIT(A) 5. DR, ITAT, Bangalore. By order Assistant Registrar ITAT, Bangalore. Printed from counselvise.com "